August 15, 2006
Reaganomics Posted by Fredric Smoler at 06:00 PM EST John Steele Gordon writes that the idea that Reagan advanced the economic interests of the rich is “at best, a Democratic talking point and an unusually silly one. For necessarily implicit in it is the idea that ‘Reaganomics’ therefore retarded the economic interests of the non-rich.”
I do not think that is the best way to frame the question. First of all, what was Reaganomics? The polite way to describe it is as a theory focusing on the effects of marginal tax rates on the incentive to work and save, with adjustments to policy yielding increases in output. The theory’s consequences for fiscal policy were described less politely (by, among others, the elder Bush) as “voodoo economics”: tax cuts without proportionately reduced expenditures, which in the short run necessarily produce very large deficits. Did the Reagan tax cuts produce an increased propensity to save? Nope. The U.S. savings rate fell from a high of 12 percent in 1982 to under 7 percent in 1989.
In the longer run supply-siders assumed such deficits to be self-liquidating by way of increased tax revenues, which would result from the tax cuts acting as a stimulus to growth. Did the deficits shrink on Reagan’s watch? Nope. Over the long boom tax receipts nearly doubled, but the deficits ballooned. In our history, those ballooning deficits were not wholly self-liquidating. Bush increased taxes, Clinton also reintroduced some fiscal discipline, and those policies are normally assumed to have helped shrink the deficits. On the other hand, the economy expanded over the course of most of the eighties and nineties, which greatly increased tax revenues, and those increased revenues eventually did the lion’s share of reducing the Reagan deficits. Does that mean that the Reagan tax cuts produced the expanding economy? John Steele Gordon sometimes writes that it is hard to tell what produces economic outcomes, and at other times says the opposite, and I agree with both of his views. It is hard to be sure, and we tend to make guesses anyway, on the basis of whatever evidence we can find.
Why did the American economy expand so impressively for most of the 1980s and 1990s? Probably for a lot of reasons. Energy shocks wore off, before hitting again this decade. We began reaping the benefits of deregulation, a lot of which was done on Carter’s watch, in response to the theory of regulatory capture. Paul Volcker’s punitive interest rates, which began late in the Carter administration, broke the inflation while checking the economy, and we sometimes measure 1980s and 1990s growth from a pretty low base, the era of savage stagflation. At some point in the 1980s and 1990s, a vast investment in the information-technology revolution probably began paying increasing dividends. Manufacturing productivity went way up, the result of a host of innovations. An era of relatively freer trade produced gains from trade. Did Reagan’s lower tax rates matter, by spurring investment even while the national savings rate fell? Could be, although much higher tax rates did no obvious harm to economies at certain times in the past, and low tax rates have done nothing special for economies at other times. All other things being equal, taxes can be too high, choking off investment, or too low, failing to provide sufficient infrastructure, sufficient numbers of educated workers, and sufficient public safety, etc., all of those public goods tending to encourage investment. As John Steele Gordon sometimes writes, though, all things never are equal, so it really is hard to know with great confidence how specific public policies will work in the future, or exactly how they worked in the past.
Okay, did Reaganomics help the rich by retarding the non-rich? The key word is by: That zero-sum formulation may imply that the gains of the first group could not have been achieved other than at the expense of the second, and I do not think that is a good way to think about what happened. As suggested above, I do not think Reaganomics was the sole or even main cause of the recent increases in economic growth, so a theory that explains the richer rich as pure banditry is a bad theory. While the incomes and wealth of the American rich have increased disproportionately, this has happened in many countries over the same period, and the phenomenon has a number of possible causes. Insofar as recent policy may have in various ways reduced transfer payments from the rich to the less rich while the rich were getting richer, different policies might well have better served the less rich. If the rich get a lot richer and everyone else somewhat richer, everyone gains, but more proportionate gains seem to me to be better policy, and more just; John Steele Gordon may disagree.
And by the way, do I think that “the average joe is too stupid to know what’s good for him”? No, I don’t. I think people elected Ronald Reagan for a lot of reasons. My hunch is that in the first instance they did so because of the infuriatingly flaccid response of the Carter administration to the Iranian hostage crisis, and in response to the economic consequences of the second oil shock. I didn’t vote for him, but I had friends who thought hard about doing so, and those were their reasons, the hostage crisis coming first. I have never quite understood why my fellow citizens reelected Reagan in 1984, but I do not thereby assume that they were dolts, any more than John Steele Gordon is obliged to assume Americans dolts because they reelected Clinton.
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